Whether you’re a first home buyer or taking another spin in Australia’s housing market, you might be interested to know that it’s possible to purchase property even if you don’t have the typical 20% deposit – as long as you pay for lenders mortgage insurance (LMI).
LMI protects your lender’s investment in case you default on your home loan. It also covers the lender’s losses in the event of a shortfall, in which “the proceeds from the sale of your home are not enough to cover the outstanding amount you owe to your lender,” says ANZ Banking.
As such, LMI can help borrowers buy their dream home with minimal savings for loan security – but it also offers no protection to home buyers. Even for those with lower budgets, it can add to their financial burdens.
You can reduce your LMI costs or even eliminate it entirely.
These are seven facts you should know about mortgage insurance from lenders.
A homebuyer’s guide to lenders mortgage insurance
What is the cost for lenders mortgage insurance in Australia?
This question is difficult to answer, as LMI is dependent upon the lender, total loan amount, and loan to value ratio (LVR), according CommBank.
LVR is the ratio of your lender’s estimated total value of your property to your loan amount. You could borrow $450,000 if you put down $50,000 on a house worth $500,000 with a $50,000 deposit. This would result in a LVR ratio of 90%.
As a very rough guide, you can expect to pay a lenders insurance premium between $8,000 and $10,000 for the example above – and it could be cheaper by around $1,000 if you are a first home buyer.
Calculating the cost of your home loan can be done using an insurance calculator by a lender. LMI premiums can be paid as a one-off payment or added to your monthly mortgage payments. This will allow you to pay it off slowly.
If you select the second option, however, the premium will accrue a interest rate and be more expensive over the time. That’s why you should consider the following options when applying for a home loan.
1. You can leverage your current income and employment to get it
A waiver may be available from banks and non-bank lenders depending on your income. You may be considered a low-risk borrower if your job is high-salary in certain industries.
Doctors, lawyers, accountants and other professionals can get flexible loan options and waivers from lenders in Australia to insure their homes. A manager or agent can help you get a job as a mining specialist, an entertainment professional, or an athlete.
To be eligible for LMI waiver, borrowers must show proof of industry affiliation.
However, you should note that “LMI waivers do not cancel out the initial deposit requirement, and you may still need to put down 10% of your home’s value,” says finance company RateCity. “Consider checking if lenders have other industry-specific requirements for LMI waivers.”
2. Register for the First Home Loan Deposit Program.
FHLDS is a federal program which allows first-time homebuyers up to 5% down on total loan amount. The National Housing Finance and Investment Corporation manages the program.
Under the scheme, the NHFIC guarantees part of a qualified home buyer’s loan from a participating lender. To be eligible, you must meet strict criteria.
First, you must be an Australian citizen. You can’t have any investment or owner-occupied property in Australia.
Second, the applicant’s income for the previous financial year should not exceed $125,000 for individuals or $200,000 for married couples or people in a de facto relationship.
Last, the property’s value cannot exceed the NHFIC threshold. The price cap may vary depending on your territory or home country.
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3. Guarantors for home loans
If you do not qualify as a first home buyer, you can eliminate your LMI costs by getting a guarantor – and you may not need to pay a deposit at all in some cases.
Guarantor loans home loans allow family members to use their homes equity to secure a part of your mortgage. If the guarantee amount is greater than or equals 20% of your total price, you no longer have to buy mortgage insurance.
You can save $40,000 if you have already saved 10% or $40,000 if you’re looking to buy a $400,000 house. LMI will run you about $7,000 under a conventional loan.
For insurance to be waived, you will need to have a minimum deposit of 20% from a qualified guaranteeor in order for $40,000 of your home equity to be guaranteed.
Additionally, your guarantor does not need to provide cash upon the loan’s settlement but the lender will turn to them when you fail to keep up with regular repayments.
4. Try to save as much security deposit as possible – even if it doesn’t reach 20%
Achieving an LVR of 80% means that you don’t have to pay for LMI so it’s still the most straightforward way to avoid paying for mortgage insurance.
Saving for a 20% deposit can be difficult for many people. If you think you can’t build enough funds within a reasonable timeframe, try to get as close as you can and consider finding a more lenient lender.
UBank recently announced they would give a loan to home-owners without LMI to borrowers who have paid at least 15% deposit.
“LMI can add tens of thousands of dollars to a loan and months of additional savings time,” says UBank. “Now, an average loan of $480 000 with an 85% LVR, owner occupier customers will only need a 15% deposit, instead of 20% and will save approximately $5,000 on insurance.”
Other financial establishments may offer similar policies in your region. St. George Bank is one example. It charges $1 LMI to qualified home buyers and offers LVRs of up to 85 percent.
5. Create a share equity agreement.
It is rare to get a SEA in Australia. However, this option is available for homebuyers who wish to lower their mortgage insurance premiums.
This arrangement should be discussed with your lender before you sign. Ask your lender if this arrangement is possible to lower your LVR from 80-80%.
Your equity partner can also be called family members. These may be either non-profits, or government organizations according to fintech company Finder.
The rest of your purchase expenses will require you to apply for a regular loan. In some cases, the SEA allows the home buyer to gradually pay the contributor’s cost over the life of the loan.
When you sell the property, you must repay your partner and give them equity.
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6. Substitute security
This applies only to people who want to sell an existing property to buy a new one.
“Instead of taking out a new loan and closing your current loan, substitution of security (sometimes known as loan portability) may help you swap the security on your current loan from the property you’ve sold to the one you’re purchasing,” says CommBank.
The cost of a substitute security will be affected by the property’s price. There will not be an additional LMI premium or fee if the LVR and loan amount are equal or decrease.
If you buy a property with a higher LVR (or loan sum), a new LMI Premium is required.
These guidelines are based off the Genworth underwriting guide, which is Australia’s largest mortgage insurance provider. There are many options for policies, depending on which LMI provider you choose and the lender.
7. Locate a low-priced property or contact a mortgage broker
Ultimately, the LMI price is directly proportional to a property’s sale value. This will make it easier to research the right home for your financial needs and do extensive research.
If you have difficulty understanding federal eligibility criteria such as FHLDS and the requirements for home loans, a mortgage broker might be an option.
They can offer financial advice to people who are looking to buy a house. Find the right lender and loan product that suits your needs.